A Health Spending Account can be a cost effective platform for you to pay for medical expenses. However, you should evaluate your situation thoroughly before you decide to use an HSA (or PHSP).
1) You are a Sole Proprietor
There is debate in the marketplace as to the eligibility of a Sole Proprietor (unincorporated one person business) using an HSA / PHSP. The interpretation of the prominent CRA tax bulletin that identifies qualifying conditions of a PHSP has resulted in a variety of different product offerings to consumers.
Olympia is the only public company to administer a stand alone HSA / PHSP, we have over 20 years of experience with 1.1 million HSA claims. Our external auditors are PWC. Olympia is regulated by provincial and federal governments.
Olympia requires a one person business to be incorporated to qualify for an Olympia Health Spending Account. A business with arm's length employees should also be incorporated.
2) Your marginal tax rate is the lowest in your province
Ultimately, an HSA is a tax plan. The purpose of this type of benefit plan for a one person business is to allow the owner to pay for her medical expenses with before tax dollars as opposed to after tax dollars. You can refer to "How a Health Spending Account will save your business money" for further details on the taxation of medical expenses.
It is debatable if you should buy a tax plan if you are in the lowest marginal tax rate in your province. You may be better off claiming your medical expenses on your personal tax return through the Medical Expense Tax Credit (METC). Let me be clear - if you are not in the lowest marginal tax, then you should strongly consider the HSA.
You can try using the Olympia savings calculator to determine the feasibility of an HSA for your personal circumstance.
3) You have few medical expenses
The average Canadian will spend approximately $1000 a year to maintain their health. Having your teeth cleaned, some prescription drugs, and a few visits to the massage therapist.
If you have no dependants, spend below $1000, and are in a low marginal tax rate, it could be argued you do not need a Health Spending Account. Wait until you have more expenses then consider setting up an HSA.
4) You have insurance coverage through your spouse
Quite often, the owner of a business or perhaps employees will say they do not need an HSA as they have adequate coverage through their spouse. Here's two points to consider:
1. Did you know premiums that your spouse contributes to their plan are an eligible expense through an HSA?
2. Traditional insurance plans are riddled with additional out of pocket costs. Think about deductibles, co-payments, and expenses categories that have poor or no coverage. The HSA can be a wonderful compliment to insurance.
5) You pay yourself in dividends
An HSA / PHSP is a contract between an employer and employee. A key aspect of an employee is the presence of employment (T4) income. While some accountants might argue that by virtue of being a director you are carrying out the duties of an employee and are therefore eligible to receive the HSA in that capacity, we encourage you to show at least some T4 income.
A workable solution is to establish a management compensation package at your business whereby you include a T4 management fee for services rendered. The HSA can be a part of the package and agreed to be received in your capacity as an employee.
6) Paying for your medical expense...twice!
Over the course of nearly 20 years experience with the HSA, the objection I hear the most is "why do I have to pay for this expense twice!?" The claim process for an HSA can certainly be confusing. Here's what you need to know.
Remember, the HSA is a contract between an employer and an employee. Presumably, at a business with one person, it can be easy to overlook the fact there are two entities - yourself and your corporation.
The first step in the claim process is to pay for the medical expense personally. You then login to your HSA and submit the expense directly to Olympia. This completes the employee fulfillment of the contract.
The next step, and to get the tax deduction for your corporation, is to involve your corporation in process. Your corporation sends Olympia a payment for the original amount of the expense you paid for personally. This creates the 100% tax deduction for your corporation. Olympia then reimburses the same amount directly to your personal bank account. The reimbursement is 100% tax free to you personally. You can read further on the savings here.
If you're not ready to sign up for the Olympia HSA, take a look at our in-depth walkthrough guide below.